Protect yourself from expense fraud

‘Insider threat’ fraud is on the rise. Here’s how you can protect yourself, your company and your clients.

The Association of Certified Fraud Examiners (ACFE) defines expense fraud as “a scheme in which an employee claims reimbursement of fictitious or inflated business expenses.” For most businesses, expense fraud will fall into five main categories:

• fabricated expenses, where spending that never took place is claimed for;
• inflated expenses, where genuine spend is topped up;
• personal expenses, where spending for personal use (such as meals) is claimed as a business expense;
• duplicated expenses, where legitimate claims are submitted multiple times;
• receipt alteration, where employees alter receipts to cover up excess or unauthorised spend.

Simon Miller, Director of Policy Communications and Strategy at Cifas, the industry body that co-ordinates best practice in fraud prevention in the UK says that ‘Insider threat’, which covers dishonesty and fraud from within the organisation is a growing problem.

Who’s committing expense fraud?

“47% of reported insider threat identifies dishonest behaviour by employees in the workplace. And we think a really significant proportion of that will be expenses-based fraud.”

This is set against a worrying backdrop: “We saw record findings in fraud overall to the National Fraud Database,” Miller reports. “It was up 14% to about 421,000 records being submitted to us, so that’s about one every two minutes. £11.4 billion was lost to consumer scams last year, and fraud costs the UK about £219 billion a year. So we’re looking at something that is almost endemic.”

And that, Cifas suggests, is partly due to changing social attitudes. Another Cifas survey earlier this year showed that nearly half (48%) of adults believe it is ‘reasonable’ to commit first-party fraud – when someone knowingly misrepresents their identity or provides false information for financial or material gain.

“We’ve seen consistently over a number of years that there is a growing societal toleration of fraud,” says Miller. “And particularly the willingness to commit small, potentially seemingly ‘reasonable’ frauds, but these small acts are increasingly common and often seen as a way of people correcting perceived social injustice or unfairness. So in essence that means people taking from the big guys because they’re not getting their own fair share more generally.”

Hampshire Council recently suffered from this, with employees faking travel and expenses claims, as well as overtime records, leading to police investigations.

What can you do about it?

For accountants that presents a problem. As the perceived gatekeepers of financial probity and integrity, they are on the front line of the effort to identify and combat fraud. That means designing systems and processes that will not just highlight fraud once it’s occurred, but also put in place barriers to it, such as two-factor authentication and greater oversight of claims.

Ultimately, a system, process or policy is only as good as the people designing and following it: “There are two things to consider: one is around systems and processes. So that means what people have access to, what information do they have access to; and then the other is around culture, behaviour and training.”

In Miller’s view, the best organisations have two approaches:

• a healthy culture of fraud prevention and training, with robust systems and processes that can’t be abused, so fraud isn’t enabled;
• making certain that people feel they belong in their workplace, and that they’re well treated within it.

“Where those two things are absent, you absolutely see systems being abused.”

So focus on your people. “I think in almost every circumstance, it will always be the human user – whether that’s the consumer or the sole business trader – who is the weak link. People have moments of fallibility; for example, those responsible may not have time to look at each and every expense claim, particularly on a really busy day. If you don’t resource that properly, you can see how and where that fraud happens.

Ultimately, the best protection is through clear communication, something that can be a challenge. “These are really difficult conversations to have,” Miller acknowledges. “It’s an awkwardness that enables the environment to develop in the first instance. So get into the practice of having these frank conversations; talking about fraud and prevention is one of the most important things you can do.”

Three quick wins on expense fraud

Policy matters: A clear policy on expenses is vital, setting out the procedures for claiming expenses for all employees. This should include a strong element of face-to-face training, bringing the issue to life for those in the business.

Audit: Regular audits will offer an effective way of catching fraud and spotting patterns of employee behaviour that can then feed into updated policies.

Set the tone from the top: Senior management needs to lead on this issue partly by setting policy and enforcing it clearly, but also in their behaviour, with zero tolerance of fraud and misuse of company funds.

Christian Doherty is a business journalist and freelance writer for AAT.